Hi 
It 'should' work (but the difference but what 'should be' and "what is" is
often huge ime in life generally.
Perhaps at the web-page try
File - "Save page"
and save into a sub-folder. That should create 1 sub-sub-folder with all
the images in and an html file that refers to those images. Problem is
that once you try moving that html file, even if you move the accompanying
folder then the links break because the html references are "absolute"
instead of the more sensible "relative" pathnames.
If you right-click on the html page document and "Open with" a text-editor
(preferably NOT notepad because it doesn't do colour-coding to make it
easier to see but almost all other text-editors do very pretty colours to
help figure out the coding). Hopefully it should be reasonably easy to
figure out what to change the
="file://c:/Documents%20and%20Settings/username/Downloads/subfolder/subfolder2/file.jpg"
to more like
="subfolder2/file.jpg"
and if that works then search&replace to get rid of all that first bit out
of every link.
Alternatively, if there are only a few images, then it might be easier to
just drag each image off the website and into a folder on your machine and
then from there drag them into the right place in the Odf document.
I'm not sure why i am so hooked on trying to solve everything with a
text-editor today! It's often not easier unless you've already done it
before, in which case the question is less likely to arise anyway 
Regards from
Tom 